How does a defined benefit pension transfer work?

pension transfer paperwork

The Pension Transfer Process

Where do I start with a pension transfer?

If you’re thinking about transferring your pensions you’re probably already sick of the jargon. You’ve heard the terms CETV, guarantee period, spousal benefits, FCA advice requirement, flexible benefits, risk etc, but what does it all mean?

Reviewing your pension and retirement planning

Firstly, do your pension research.

Before considering any changes to your pension and retirement planning, you must get the latest information about your current plan. Make sure you understand what you have in place. If that’s enough to suit you, don’t make any changes.

How to research your current pension plans

Pension providers often change names and contact details. A lot of pension members forget to update their personal details with their pension providers. This has resulted in an estimated 800,000 ‘lost’ pensions in the UK, amounting to some £9.7bn of pension money.

Make sure you trace lost pension policies. We can help, but you can also use the pension tracing service. All you need is details of who you worked for, and when. Check if your pension is listed in our scheme directory for contact details and headline benefits.

We offer a free research toolkit to help you write to your pension scheme/s and ask the right questions. We want to help you research your pension plans to the standard a financial adviser does. When you get this information back, use our jargon buster guide to decipher it, or ask us for help.

Look at what else is available from a pension plan

Will transferring your pension to a new one benefit you? Once you understand your current pension, look at alternatives and compare benefits to make an educated decision. The best private pension for you could be a low-cost provider retirement account, a Self Invested Personal Pension (SIPP), or a Qualifying Recognised Overseas Pension Scheme (QROPS) if you live abroad.

Make sure you understand what private pension plans offer, and compare the benefits that are most important to you. We’ve written a number of blogs about private pension planning, and our guides contain lots of useful information.

What is a ‘Safeguarded’ pension and why is it so valuable?

A defined benefit scheme contains a pre-defined income for retirement. That’s an in-built pension benefit which would be lost if you transferred your pension away. This in-built benefit is the part of the pension that is ‘safeguarded’.

Safeguarded pensions can be other sorts of plans, but are generally final salary or career-average schemes.

Since 2006, private pension flexibility has been under development. In 2015, many improvements to private pension planning were introduced. This included enhancements to access, functionality and tax benefits as well as the ability to fully withdraw funds. This led to a rush of interest in pension transfers.

Safeguarded pension assets are valuable. They are immediately lost if transferred. So, in April 2015, the Financial Conduct Authority announced that anyone moving funds away from these plans must take FCA regulated advice.

Why do I need advice?

You need advice because without it, you can’t make any changes to your pension. Having an attractive Cash Equivalent Transfer Value (CETV) from your pension is only the first step in finding out if a pension transfer is right for you.

The FCA advice requirement is there for your protection. We discuss the detailed analysis conducted by a Pension Transfer Specialist (PTS) in another blog post, and you can find a lot more information in our guide to pension transfers. A PTS has the responsibility to ensure you are not financially worse-off in the event of a transfer.

In some cases, a PTS may refuse to authorise a pension transfer. This may become a contentious issue with inevitable personal financial hardships due to the fallout from the Covid-19 economic crash. Time will tell whether the FCA steps in to further protect pensions from early encashment.

The role of the Pension Transfer Specialist (PTS)

A PTS will statistically compare your existing pension with the proposed new plan. They will conduct a highly detailed pension transfer analysis in the form of an ‘Appropriate Pension Transfer Analysis’. You will be provided with a ‘Transfer Value Comparator’ report.

The PTS’s final recommendation must be highly personal to your circumstances.

Their advice must balance any want for flexibility and control over pension wealth with the need for long-term financial security. The CETV will be evaluated for its worth against the DB scheme income in the PTS’s statistical comparator analysis. It’s important you consider their reports before making any decision to transfer your funds.

The pension transfer administration steps

Once you’ve taken advice and decided to transfer your benefits, here’s what happens next…

  1. Paperwork is completed
    • DB Pension paperwork can be heavy. There’s a lot of documents to complete and a lot of places to sign. Your pension transfer paperwork will consist of at least:
      • Your adviser’s documentation
      • Your ID documents
      • Your new pension application
      • Your new pension investment forms (sometimes combined with the application form)
      • Your existing scheme transfer-out (discharge) documents
      • A ‘financial advice declaration’ from your FCA regulated Pension Transfer Specialist
    • Read it all through and make sure you keep your own copies.
    • Don’t let anyone complete forms after you’ve signed them.
  2. Paperwork is sent to your new pension
    • All paperwork firstly goes to your new pension provider. They will process your new account opening and complete their parts of your existing scheme paperwork to say they’re ready to accept funds.
    • Completed paperwork will next go to your existing scheme. These final documents should now be completed by you, your adviser and your new pension plan.
  3. Checks are undertaken
    • There’s a few checks undertaken along the way, the main three are:
      • With the FCA Adviser.
        • Scheme checks you’ve received qualified FCA regulated advice. They must be sent confirmation of this from your UK regulated adviser.
      • With the new pension.
        • Scheme checks on your new plan. This can be more detailed checks in the case of QROPS
      • With you
        • Scheme checks your understanding. This has been recently introduced with the FCA’s focus on all parties taking the transfer responsibility seriously. Most DB schemes now send a questionnaire to members prior to approving a transfer. This is to ensure you understand the advice you’ve received and that your new plan will improve your financial circumstances and not put you at risk.
  4. Transfer is approved
    • Once all paperwork and checks are complete, the scheme will confirm that the transfer of pension benefits has been approved.
  5. Funds are readied
    • A DB scheme must disinvest member’s funds ready for a transfer out. This is often done in one-week tranches to allow a number of member transfers to be administered at once.
  6. Cash is transferred
    • Once the money is ready, it is sent directly to your new pension provider. At no point in the process should you or your adviser actually handle your pension money. It is sent directly to the client bank in your new pension, and remains under pension trust rules, allocated to you as legal owner.
  7. Cash arrives in the new pension ready for investment
    • The pension transfer is complete when the money is sitting in cash within your new plan. From there, you will be able to employ your investment strategy and/or withdraw funds as retirement benefits.

How long does a pension transfer take?

Your initial research can take a couple of months. From the point you write to your pension scheme to getting your calculated Cash Equivalent Transfer Value (CETV) and statement of preserved benefit, typically takes around a month. From the point of calculation, your CETV will be ‘guaranteed’ for 3 months.

The CETV guarantee period means that you must get the correctly completed documentation at the desk of your pension scheme by the 3-month deadline.

This is often tight. Once you receive your CETV, act quickly. Many pension scheme members have missed their guarantee period by taking too long to consider their options.

Don’t rush your decision

While we absolutely encourage you take a potential transfer seriously, you must make a prompt decision. While you must not rush your decision, you must focus your time. Making important decisions about your long-term financial future can be daunting. If you can’t decide within the 3 month period, you can apply for a new CETV. This will be different from your last calculation, and could be higher or lower.

Considering the steps involved in administering a pension transfer described above, don’t leave it until the last minute. The paperwork can take a couple of weeks to be completed, checked and approved – which must all be done by the guarantee deadline.

From the point all completed documentation is completed and accepted by your pension, it can take another 3 months for the pension funds to be sent.

All in all, a pension transfer takes between 3 and 6 months!

Pension Transfer Personality Quiz

Take our free pension transfer personality quiz to find out if a pension transfer is right for you!

1 / 10

How would you describe your investment or financial planning experience?

2 / 10

Where will you live in retirement?

3 / 10

What sort of taxpayer will you be in retirement?

4 / 10

How would you describe your relationship with money and finances?

5 / 10

Are your essential outgoings already covered by other retirement income?

6 / 10

Will anyone else be reliant on your pension for their financial security?

7 / 10

When you retire, will you need to withdraw a lump sum?

8 / 10

Do you require ad-hoc access to your pension funds in retirement?

9 / 10

How would your ideal retirement income be structured?

10 / 10

If you died, who would you want to benefit from your pension money?

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